Expect more of the same in the second quarter. That’s the key message of Schwab investment strategists in their recent take on the coming three months.
“Investors were taken on a wild ride through the first quarter. However, the second quarter is starting within shouting distance of the year’s starting mark. We believe the trend is generally higher, but bouts of volatility are likely to persist,” stated Liz Ann Sonders, Brad Sorensen and Jeffrey Kleintop, in a report released Friday.
And yes, more of the same includes further political developments.
“Potential Federal Reserve action will likely stay at the forefront of investors’ minds, with some conflicting messages coming after its recent meeting adding to the consternation. This being a presidential election year could make things a bit more interesting as we march toward November,” the Schwab analysts wrote.
On the bright side, emerging markets “have surged ahead, aided by a weaker U.S. dollar,” they point out. But while this action has “been encouraging,” future gains in this group depend on improving global growth.
The past quarter involved lots of jitters, though the Standard & Poor’s 500 index ultimately gained 1.3%.
“We saw ramped up fears of both a global and domestic recession push stocks substantially lower and into correction territory,” Sonders and her colleagues said.
On Feb. 11, though, a rally “brought equities back to within shouting distance of the flat line for the year. Recession fears faded with better data, and sentiment was aided by a dovish Federal Reserve meeting that saw forecasts for rate hikes this year move to two from four,” they explained.
Meanwhile, emerging market bonds and equities (as measured in U.S. dollars) improved 8.5% and 5.7%, respectively. Gold, however, outran these strong performers with a 16% jump in the period.
“Commodities also staged a nice turnaround, aided by a flattish to slightly weaker U.S. dollar, while oil and stocks continue to trade in pretty tight lockstep,” the Schwab strategists explained.
Sticky Stocks & Oil
The group is cautious on stocks, given the deep connection between today’s equity performance and low energy prices.
“We remain neutral on equities — meaning investors should remain at their long-term equity allocations — and believe 2016 is shaping up to be much like the first quarter, volatile at times but generally trending higher,” they stated.
“As long as the oil/stocks correlation remains elevated, continued improvement in the stock market may hinge on the path of oil prices. With oil inventories at historic highs and the ability of oil rigs which have been shuttered to restart in relatively short order, it’s tough to paint a picture of oil moving substantially higher from here over the course of the year,” the Schwab strategists said.
On the upside, low oil prices often has a positive impact on growth in GDP, “which could bode well for potential upside surprises in 2016,” they add.
These days, however, many companies appear reluctant to spend money on capital improvements.
“Their preference appears to be adding to the labor force as 215,000 jobs were added during the month of March. The calculation appears to be that given the uncertainty of economic developments, companies believe it’s easier to lay off employees if necessary, rather than trying to get rid of equipment at fire sale prices,” explained Sonders, Sorensen and Kleintop.